Half of Madoff Losses Recovered After $7 Billion Settlement

Federal prosecutors and a court-appointed trustee have recovered nearly half of the estimated $20 billion in funds lost in Bernard Madoff’s multi-billion dollar Ponzi scheme.

The benchmark, announced at a December 17 press conference, was met after the widow of drowned Madoff investor Jeffry Picower signed a $7.2 billion settlement agreement with the U.S. Justice Department and Irving Picard, the court’s trustee in the Madoff bankruptcy. This is now added to more than $2 billion that has already been secured.

The Picower settlement is the largest forfeiture in American history, according to U. S. Attorney for the Southern District of New York Preet Bharara.

The development marks a significant step forward for those tasked with recovering the assets stolen in the Madoff scheme. But questions loom as to how those assets will be distributed among Madoff’s burned investors.

The $7.2 billion Picower recovery will be split between the customer fund administered by Picard and a separate fund administered by the Department of Justice. A portion of the settlement was approved December 17; a bankruptcy judge will also rule on the settlement January 13.

Picower, who Picard alleged in a May 2009 court filing “knew or should have known” that the Madoff operation was a fraud, died of a heart attack in his Palm Beach, Fla., swimming pool in October 2009 at age 68.

The current $20 billion estimate of the total value of Madoff customer losses is down substantially from the estimates of $65 billion that circulated two years ago. The higher estimate was revised downward after Picard determined that customer claims should be calculated based on the amount invested minus the amount withdrawn, not on the value of the last account statement. Picard’s valuation method has been upheld in the bankruptcy court and is currently being appealed.

Once the bankruptcy court judge approves the Picower settlement, the $5 billion share that will go Picard’s customer fund will boost the amount he has collected to more than $7.5 billion. But so far, Picard has only approved Madoff customer claims of $5.8 billion — nearly $2 billion less than the total he has collected to return to investors.

At a December 17 press conference held in the lobby of the U.S. Attorney’s Office in Manhattan, Picard explained the discrepancy, saying that he had not yet approved claims by certain investors — including a number of feeder funds — because of pending suits he had filed against those investors transfers made within 90 days of the Madoff collapse. He said that their claims would be included in his total after those suits are settled.

Picard did not answer directly when asked what he would do if he recovered more from Madoff investors than he agreed to pay out, saying only that the total approved claims could end up being more than $20 billion. But Orlan Johnson, chairman of the Securities Investor Protection Corporation, said at the press conference that all funds recovered from Picower would end up in the hands of Madoff victims.

Picard said at the press conference that Madoff victims could begin receiving initial payments at the end of the first quarter of 2011. But he said that reserves would be kept in case an appeals court overturns his method of calculating the amounts owed to Madoff victims, which would vastly inflate the amount of customer claims. “We have to reserve for that possible eventuality,” he said.

Bharara noted that eight individuals have been indicted on Madoff-related charges and six have been convicted. He said that criminal investigations into the matter are ongoing. In a May 2009 bankruptcy court filing, Picard alleged that Picower was among the primary beneficiaries of Madoff’s scheme. In fact, Picower’s earnings from the scheme far outstripped Madoff’s own net worth, suggesting that Picower benefited even more than Madoff himself.

In a statement released through her public relations firm, Jeffry Picower’s widow, Barbara Picower, said, “I am absolutely confident that my husband Jeffry was in no way complicit in Madoff’s fraud and want to underscore the fact that neither the Trustee nor the U.S. Attorney has charged him with any illegal conduct.”

Picard said that Barbara Picower and her attorney had been cooperative in negotiating the record-breaking settlement. “They were open and honest in sharing information and conducting good-faith negotiations with us,” Picard said.

It’s unclear how much of Picower’s estate remains. Before the 2008 revelation of the Madoff affair, the Picowers were prominent philanthropists. Their Picower Foundation, which supported Jewish groups, medical research and other causes, gave away $24 million in 2007.